The recent high for gold prices has not brought record interest in gold, and the rollover from the April contract to the June one underway will add to the market’s volatility. The case for owning gold exchange traded funds (ETFs) in a portfolio as a safe haven, a hedge, or a diversification tool can be mixed, depending on which side of the economy you are gazing from. [Earnings Optimism Boost ETFs.]
Janet Briaud for The Wall Street Journal reports for the short term, gold can be a safe haven and can be used as a short-term hedge, or a short-term speculative play on volatility. In the longer term, gold can be a good way to invest in the expectation of higher inflation—a growing possibility. [What Gold To Own With ETFs.] Here are a few points to consider before jumping in:
The Case for Gold:
- As the Fed is desperately trying to stimulate the economy, housing prices remain weak. Unemployment remains high. On the political side, the Middle East has been far from stable . We have learned from the past three years that events can move extremely quickly in our increasingly interconnected world. Stability will be more and more fleeting—perhaps permanently.
- Gold could be a good way to invest in expectation of higher inflation. As governments battle debt problems and central banks intervene on their behalf, we could see deliberate weakening of currencies in many developed countries.
- Gold is simple: Gold can be easily held in most portfolios, particularly with the advent of gold-bullion ETFs such as the SPDR Gold Shares (NYSEArca: GLD) which has gained an average annualized 20%-plus in the past three years.
- Another consideration for the long term is that gold may partially regain its status as a reserve currency, especially as central banks are stockpiling it as a reserve currency. This is creating extra demand.
The Case Against Owning Gold:
- Gold can be volatile, for one thing, and prices certainly look more frothy than they did a decade ago.
- Moral issues: Is mining exploitative to the people in the mines? To the environment? Does it bring prosperity to the producing countries? Or does it foster corruption and poorly diversified economies? And this is entirely personal so there is no right or wrong answer.
Whatever way you are looking at the market, and your portfolio, it is imperative to watch the trendlines, and decide for yourself what works and what does not. By following a simple strategy, such as watching the 200 day moving average, the decision whether to invest in gold or not will be an easier one. [An ETF Trend-Following Plan For All Seasons.]
For more information about gold, visit our gold category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.